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Are Emerging Market Stocks Headed for a Fall?

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After a flood of inflows that have driven up valuations, some investors are concerned that emerging market stocks have gotten ahead of themselves. Yield-seeking investors have poured money into emerging market stocks keeping share prices elevated in the face of geopolitical tensions. Should inflows and sentiment reverse, some investors are worried emerging market stocks could be headed for a fall. Saumya Vaishampayan and Ira Iosebashvili report:

With European elections looming and tensions spiking between the U.S. and North Korea, “there is elevated political risk on too many different fronts,” said Thanos Bardas, a portfolio manager at Neuberger Berman. “Markets have moved up a lot. Now you can see the pendulum swinging in the other direction.”

Neuberger Berman recently took profits on the Mexican peso and other emerging market currencies, Mr. Bardas said. He intends to stay on the sidelines until at least later this month after the elections in France, where the likelihood of success by far-left and far-right candidates has caused jitters among investors.

Some data justify the valuations in emerging markets: Chinese growth has steadied and Argentina appears to be slowly emerging from a recession. Global demand has also buoyed exports, while higher U.S. tariffs have yet to materialize, helping boost sentiment toward trade-dependent developing economies.

But money rushing into assets of developing nations suggests a search for yield could be trumping traditional metrics like a country’s economic and political outlook. Foreign investors poured an estimated net $29.8 billion into emerging-market stocks and bonds in March, the highest monthly total since January 2015, according to the Institute of International Finance. Nearly three-quarters of that total—$22 billion—went into Asia.

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Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.